What is a California FHA Loan?
A California FHA loan is a home given by private lenders but insured by the federal government. With the insurance, the government agrees to pay a portion of the outstanding loan if the borrower defaults. The insurance is provided by either the Federal Housing Administration (FHA) or the US Department of housing and urban development (HUD). Since FHA loans are insured borrowers considered them lower risk, the lowered risk has benefits for the borrowers as well. FHA loans have a lower minimum credit requirement than most conventional loans. They also tend to have lower rates. The most distinct advantage of FHA loans is their low down payments, either 3.5% or 10% depending on your credit rating. Additionally, in contrast with conventional loans, the down payment can be paid as a gift from a willing friend or even family member, or by a government grant. The lower down payment and the potential for the family to cover the costs make FHA loans ideal for first-time homeowners. Below, we at Online Loans have broken down the assorted information available across the web into a convenient need-to-know to make getting you FHA loan as simple as possible.
While FHA loans are designed to help a broader range of borrowers get financing for their homes, both lenders and insurers need evidence that the loan will likely be paid back. The primary means by which risk is established is by the borrower’s credit score. To get insured for an FHA loan with a down payment of 3.5% your FICO credit score must be 580 or better. To get insured for an FHA loan with a down payment of 10% you typically need a credit score of at least 500, although exceptions are sometimes made for people with a worse credit score, if they have a good credit history for the last two years. Individual lenders often have stricter credit minimums than the FHA minimum. To help augment the borrower’s credit information lenders also look at the borrower’s debt to income ratio. Debt to income is measured in two ways. The first is the mortgage payment expense to income ratio, which is the percentage of your monthly income that would be spent on the monthly payments on the FHA loan. This needs to be less than 31% to qualify. The second measurement is your total fixed payment to income ratio, this is more comprehensive, including all the types of debt payment you need to make (your mortgage, car loans, student loans, etc). This needs to be less than 43% of your monthly income. There are some additional requirements on top of the credit score and debt requirements. The home the FHA loan is being used to buy or improve must be the primary residence of the borrower. The borrower must be must be a legal resident. The borrower must have held consistent employment for the last two years. The maximum size of the loan is determined by the type of home and the county the home is in. In California, the smallest maximum is $294,515 for a single-unit home in one of the less expensive counties. The largest maximum is $1,307,175 for a four-unit home in on of the most expensive counties.
Since the loans are given by private lenders and the government agencies just insure them, the rates are not standardized. However, the fact that they are government guaranteed means they typically have lower rates than conventional loans. These lower rates are offset slightly by the need to pay for additional insurance, which costs between 0.45% and 0.85% per year. FHA loans always have fixed rates, meaning the interest rate does not fluctuate with changing economies. Rates with smaller loans tend to be higher since the administrative costs are roughly the same whether the loan is small or large. Rates tend to be higher for longer-term loans because there is a greater risk of the borrower losing financial stability in that time and a greater risk that prime interest will increase. In California typically APRs range from 4.5% to 5%.